I have always been much more interested in big market moves than opportunities for small profits. What’s interesting to me is for most new traders, all they want to do is day trade for small market moves. Day trading is fine but fewer trades with large profit zones has always been easier and much more profitable to me. This is one of, if not, the most important things to consider when speculating in markets. Below is a passive income trade I was in for a couple weeks with a profit target of over 150 ticks in the Canadian Dollar.
Sam Seiden Trade: May 2017 / Profit: $4,000+
Canadian Dollar Futures
The profit zone is the distance in price between the entry point and the profit target price. When looking for trading opportunities, people tend to focus on where the next big turn in price will happen. As I often write about, these turns happen at price levels where supply and demand is out of balance. When looking at charts, you will find that there are many supply and demand levels. By no means are we interested in taking trading opportunities at all the levels we find. In fact, when considering profit zone into the filtering mix, we would ignore most of the supply and demand levels we find and narrow our focus down to the supply and demand levels that have large profit zones associated with them like the trade above.
To explain the concept of profit zone and its importance in trading, let’s take a look at the Canadian Dollar (CD) trade above. Here we are looking at a larger time frame chart of CD. Notice the supply level above, just above the blue line which is the profit target. This is where we expected there to be more willing supply than demand. The area in the grey box is the “profit zone” which is basically the distance from the supply level to the demand level. Notice in the grey box, all we have is plenty of trading activity but no supply zones. In other words, there were no supply levels to stop price from moving higher through that area once I bought at demand (little circle on chart). The trading opportunity was to buy at the demand level and profit from a move up in price through that price action in the grey box, the profit zone.
The key element here is to identify where the demand and supply is, then look at current price, and finally determine the “path of least resistance” as that is where the next move in price is likely to go. Meaning, price is likely to have a relatively easy time moving through that grey box price action, the profit zone. Keep in mind a VERY important point here: I am coming to all these conclusions BEFORE entering the trade. You must perform your analysis in advance and make your decisions before its time to push the button or this will never work.
As I mentioned earlier, there are many supply and demand levels on a chart and many large and small profit margins. The key for the astute trader is to be able to identify objective supply and demand levels. Then and only then will you be able to find supply and demand levels that have huge profit zones associated with them. What I do is ignore most supply and demand levels on a chart and only focus on the ones that have a great distance between them. This does two things. First, it obviously offers an attractive risk/reward opportunity. Second and just as important, the larger the profit zone, the greater the probability of the trade working out. This is because when you have a big profit zone, by definition your supply and demand levels are far out on the supply and demand curve. Entering your trades at market price extremes increases the probability of success.
To better understand the concept of profit zones in trading, think of profit margins in any other business. Think of how companies who sell products determine what to sell. Most of the decision if not all of it comes down to profit margin. Think about companies who produce products and how they decide what to produce. Most, if not all, of that decision comes down to profit margin, which I am calling profit zone. The decision on which trading opportunities to put your hard-earned money at risk on is absolutely no different, and in fact, we chart profit margin/zone the same way as any successful company would.
Hope this was helpful. Have a great day.
Sam Seiden – firstname.lastname@example.org